Social media — from Facebook (FB) to Twitter and beyond — has been going strong for several years and doesn’t look like it will slow down anytime soon. Of course, there are numerous options out there for people who want to use social media … and many folks even choose several of them.
The same is true of option strategies. With that in mind, here is trade idea for Facebook stock that just might be the best choice.
Facebook (FB – 50.20): Put Credit Spread
The trade: Sell the Nov. 29 43/45 Put Credit Spread (selling the Nov. 29 45 put and buying the Nov. 29 43 put) for 25 cents or better.
The strategy: The maximum potential profit for this trade is 25 cents if FB is trading above $45 at Nov. 29 expiration. The maximum loss is $1.75 ($2 – 25 cents) if FB stock is trading below $43 at Nov. 29 expiration. Breakeven is $44.75 at expiration based on a credit of 25 cents.
The rationale: Facebook earnings were recently announced and FB stock moved significantly higher in after-hours trading before cooling off. The next day, Facebook stock opened lower and then traded higher.
Why the confusion for FB? Well, the volatile activity of Facebook stock after its earnings could have been caused by a couple of factors. FB earned 25 cents per share and revenue for the quarter was over $2 billion. Both of these handily beat most estimates. Daily active users even rose from the previous quarter.
But during the conference call, management acknowledged there was some competition from Twitter and that FB might be losing its cool with teens.
Even if that is the case, though, FB still looks like it has plenty of room to grow, with most of its revenues coming from advertisement.
Click to EnlargeTaking a look at the Facebook stock chart, FB shares went on a wild up-and-down run after its earnings announcement as stated above. This was the first time FB threatened to move below the daily 50-day simple moving average since July. But Facebook stock rallied and easily finished above the moving average on Thursday.
In addition, this credit spread trade idea is set up just below the last significant drop in FB stock in October. Facebook pulled back and fell to just above $45. That pivot low could be an area of support for Facebook stock — a good thing since the sold strike is just below it.
The bottom line: If faith is restored in Facebook stock by investors, this trade idea will definitely be worth bragging and posting about.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.